What is a Home Loan Modification?

A loan modification typically refers to an adjustment of monthly payments on an individual’s mortgage loan. This can include a reduction or an increase of the monthly payment amount. 

The home loan modification process includes changing the terms of a mortgage which were originally agreed upon between a borrower and a lender, also known as a mortgagor and a mortgagee. Typically, the mortgagor, or borrower, makes payments on their mortgage until their loan and interest are fully paid off. 

Until that time, the mortgagee, or lender, has a lien on the property. If the mortgagor sells the property prior to paying off their mortgage, the unpaid balance is remitted to the lender and the lien is released.

When the mortgagor requests a loan modification from a lender, it is often due to an inability to stay current on their payments as outlined in the mortgage. The home loan modification usually involves a workout plan or a restructuring of the loan by the lender. 

A home loan modification may result in the changes to the following:

• The monthly payment on the loan;
• The interest rate;
• The terms; or
• The outstanding principal.

A loan modification may include a change in the interest rate. It may also, however, involve a change to the overall type of mortgage that is being issued. 

A loan modification is typically done if a borrower is having trouble keeping up with their current loan rate. In the majority of cases, the loan modification terms are governed by contract principles.

This means that both parties must agree to any changes which may be planned for an already existing payment arrangement. However, any violations of the agreement terms may lead to various legal issues and can even result in foreclosure proceedings being commenced.

Loan modification disputes are somewhat common because there are so many legal aspects of loan modifications. Common loan disputes can include:

• An unauthorized increase in rates. There can be a dispute as to whether a lender was authorized to increase monthly pay rates. Typically, the borrower needs some sort of notice that the rates are changing;
• Failure to pay. Loan modifications typically occur because the borrower has already failed to pay some monthly payments. However, if the borrower fails to make payments even after a modification, it may lead to a lawsuit for breach of contract;
• Loan fraud. This is the use of deception or misrepresentation regarding loan terms, which is illegal.  Knowingly withholding relevant loan modification information from a borrower may lead to legal penalties as well as, in some cases, criminal penalties for the lender; and
• Coercion. The lender is prohibited from using force or threats of harm to coerce the borrower into agreeing to a loan modification.

How do I Know if I am Eligible for a Loan Modification?

If an individual is a homeowner who is faced with a financial hardship which may result in a foreclosure, they may be eligible for a home loan modification. In order to determine whether an individual is eligible for a home loan modification, a lender will perform an analysis of their financial situation and other documents, including:

• A hardship letter that discusses the individual’s financial difficulty;
• Recent pay stubs;
• A list of the individual’s assets and their valuation;
• Credit card statements; and
• Loan statements.

After gathering all of the required documents, an individual can call their mortgage servicer and request a loan modification. It is not necessary for the individual to prove that they are late in making their payments on the loan. It is only necessary to prove that the individual is likely to be in default on their loan if it is not modified.

Which Loan Modification Programs are Available?

Various lenders offer different types of home loan modification programs. One program which is popular is the Home Affordable Modification Program (HAMP).

HAMP was created in 2009 by the federal government to provide relief to homeowners from financial stress. In some cases, more homeowners may benefit from HAMP because the eligibility requirements are less strict than when the program was introduced. 

A homeowner who falls into the following categories might be eligible to participate in HAMP:

• Homeowners requesting a modification on a house that is not their principal residence. This can also include a home which is rented or the homeowner plans to rent it;
• A homeowner who previously failed to qualify for HAMP because the ratio of their debts to their income was 31% or less;
• Homeowners who received a HAMP plan for a trial period and then subsequently defaulted on their payments; and
• Homeowners who received a HAMP permanent modification and defaulted on their payments, which caused them to no longer be in good standing.

Has COVID-19 Affected Loan Modification Programs and Eligibility?

COVID-19 has affected every aspect of life around the world, including the loan modification process and eligibility. The Federal Housing Administration (FHA) has recently announced some streamlined COVID-19 recovery options to assist homeowners with FHA-insured mortgages who are financially impacted by the pandemic to bring their mortgage current and to remain in their homes.

The FHA also offers several mortgage relief programs in addition to a COVID-19 forbearance. This includes a standard forbearance which may last as long as six months as well as a special forbearance for unemployment, which may last up to a year or more. 

The FHA is also currently evaluating borrowers that have FHA-insured loans for the COVID-19 Advance Loan Modification (ALM) if their loan is 90 days delinquent or more. The ALM may be implemented at this time and no later than 60 days from August 24, 2021.

The ALM program allows eligible borrowers to receive a minimum 25% reduction in their monthly mortgage payment’s principal and interest. This program is automatic.

This means that a servicer is required to review eligible borrowers for the option and provide loan modification documents which will significantly reduce the borrower’s monthly payments. A borrower is not required to contact their lender or servicer to receive this modification.

To qualify for the ALM program, the property can be owner-occupied or non-owner occupied and a borrower must be delinquent by 90 days or more. If a borrower is eligible, the lender is required to prepare and send loan modification documents to the borrower, including a cover letter which provides:

• An explanation of the terms, including the modified payment amount;
• The date which the next payment is due;
• A statement that there is no lump-sum payment required;
• A statement that, if the borrower does not accept the offer, a borrower may quality for another loss mitigation option;
• A statement that a borrower must sign and return the loan modification documents within 30 days of receipt; and
• Contact information for the services.

It is important to note that many lenders of all types are offering relief options. An individual can contact their lending company to determine what type of relief options may be available.

In many cases, individuals are not familiar with the options and requirements for all of the available choices during this pandemic time. If an individual has any questions, an attorney is always willing to assist and provide explanations regarding the most current laws and the different available options.

Should I Hire a Loan Modification Lawyer?

Yes, it is essential to have the assistance of a mortgage lawyer for any loan modification issues you may have. A loan modification may be very helpful for both the borrower and the lender, as adjustments may help the parties maintain a working relationship.

Loan modifications, however, can also be the source of legal disputes. If you are involved in any type of loan modification dispute, it is important to contact a lawyer as soon as possible. Your attorney can review your situation, provide you with advice regarding your options, and represent you in court.